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CONSOLIDATED AND SEPARATE INCOME STATEMENT Dalekovod Group Dalekovod d.d. (all amounts are expressed in thousands of HRK) Note 2016 2015 2016 2015 Sales revenue 7 1.159.694 1.202.046 815.216 928.317 Other income 7, 8 73.566 82.927 75.158 81.935 Change in work in progress and finished goods 33.149 (10.646) (35) (76) Cost of trade goods sold (157.298) (143.224) (85.946) (127.534) Cost of materials and services 9 (592.636) (598.172) (456.332) (526.107) Staff costs 10 (282.467) (264.681) (175.902) (156.598) Depreciation and amortisation 17, 18, 19 (51.335) (50.907) (34.321) (33.950) Other operating expenses 11 (112.824) (175.895) (81.603) (129.910) Other gains/(losses) net 12 (565) 3.297 5.755 10.035 Operating gain/(loss) 69.284 44.745 61.990 46.112 Finance income 13 24.673 6.272 10.144 17.410 Finance costs 13 (41.371) (38.251) (33.975) (24.403) (16.698) (31.979) (23.831) (6.993) Share in profit/(loss) of associates and joint ventures 21 26 14 - - Profit / (loss) before tax 52.612 12.780 38.159 39.119 Income tax 14 (15.843) (8.761) (12.971) (7.969) Net profit / (loss) 36.769 4.019 25.188 31.150 Net profit / (loss) attributable to: Equity holders of the Company 36.769 4.282 25.188 31.150 Non-controlling interests - (263) - - Net profit / (loss) 36.769 4.019 25.188 31.150 Basic and diluted profit / (loss) per share (in HRK) 15 1,49 0,17 11,03 - The financial statements set out on pages 21 to 111 were approved by the Management Board on 29 April 2017. The accounting policies and notes form an integral part of these financial statements and consolidated financial statements. 21

CONSOLIDATED AND SEPARATE STATEMENT OF OTHER COMPREHENSIVE INCOME Dalekovod Group Dalekovod d.d. (all amounts are expressed in thousands of HRK) Note 2016 2015 2016 2015 Net profit / (loss) 36.769 4.019 25.188 31.150 Other comprehensive income / (loss): Foreign exchange differences (71) (632) - - Income tax rate change 14 1.693-1.693 - Total other comprehensive income / (loss) 1.622 (632) 1.693 - Total comprehensive income / (loss) 38.391 3.387 26.881 31.150 Comprehensive income / (loss) attributable to: Equity holders of the Company 38.390 3.650 26.881 31.150 Non-controlling interests 1 (263) - - Total comprehensive income / (loss) 38.391 3.387 26.881 31.150 The financial statements set out on pages 21 to 111 were approved by the Management Board on 29 April 2017. The accounting policies and notes form an integral part of these financial statements and consolidated financial statements. 22

CONSOLIDATED AND SEPARATE STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2016 Dalekovod Group Dalekovod d.d. (all amounts are expressed in thousands of HRK) Note 2016 2015 2016 2015 ASSETS Intangible assets 17 14.089 17.711 9.817 14.869 Property, plant and equipment 18 443.312 455.351 180.287 172.610 Investment property 19 6.372 363.433 187.182 205.586 Investments in subsidiaries 20 - - 276.892 285.998 Investments in associates 21 2.743 14.668 8.290 20.241 Financial assets available-for-sale 22 4.568 4.537 4.074 4.254 Embeded derivatives 5 - - - - Loans and receivables 24 48.061 47.183 62.944 50.831 Non-current assets 519.145 902.883 729.486 754.389 Inventories 25 156.727 117.733 11.060 20.489 Trade and other receivables 26 568.659 634.727 493.657 565.183 Income tax receivable 3.006 2.489 1.180 - Financial assets at fair value through profit or loss 27 30.485 30.377 30.485 30.377 Cash and cash equivalents 28 105.428 102.077 86.849 81.849 Assets held for sale 29 65.043 65.043 - - Current assets 929.348 952.446 623.231 697.898 Total assets 1.448.493 1.855.329 1.352.717 1.452.287 The accounting policies and notes form an integral part of these financial statements and consolidated financial statements. 23

CONSOLIDATED AND SEPARATE STATEMENT OF FINANCIAL POSITION (continued) AS AT 31 DECEMBER 2016 Dalekovod Group Dalekovod d.d. (all amounts are expressed in thousands of HRK) Note 2016 2015 2016 2015 EQUITY AND LIABILITIES Share capital 30 247.193 247.193 247.193 247.193 Share premium 30 86.142 86.142 86.142 86.142 Legal reserves 30 11.652 11.652 11.487 11.487 Treasury shares 30 (8.466) (7.816) (8.466) (7.816) Statutory and other reserves 30 75.584 75.584 40.654 40.654 Revaluation reserves 30 69.397 67.704 69.397 67.704 Translation reserves (3.188) (3.116) - - Accumulated loss (217.711) (254.480) (175.223) (200.411) Shareholders' equity 260.603 222.863 271.184 244.953 Non-controlling interests (695) (696) - - Total equity 259.908 222.167 271.184 244.953 Borrowings 31 367.049 393.641 373.025 399.826 Mezzanine debt 32 23.166 22.166 27.373 26.191 Provisions 34 23.513 13.297 20.779 10.718 Trade and other payables 33 10.199 47.275 12.878 62.211 Deferred tax liability 14 15.233 16.926 15.233 16.926 Non-current liabilities 439.160 493.305 449.288 515.872 Borrowings 31 153.048 458.944 118.700 118.066 Mezzanine debt 32 58.509 58.509 62.000 62.000 Provisions 34 2.343 16.329 1.875 15.751 Trade and other payables 33 524.869 597.351 439.475 486.989 Income tax payable 10.656 8.724 10.195 8.656 Current liabilities 749.425 1.139.857 632.245 691.462 Total liabilities 1.188.585 1.633.162 1.081.533 1.207.334 Total equity and liabilities 1.448.493 1.855.329 1.352.717 1.452.287 The financial statements set out on pages 21 to 111 were approved by the Management Board on 29 April 2017. The accounting policies and notes form an integral part of these financial statements and consolidated financial statements. 24

CONSOLIDATED AND SEPARATE STATEMENT OF CHANGES IN EQUITY Group (all amounts are expressed in thousands of HRK) Note Share capital Share premium Legal reserves Treasury shares Statutory and other reserves Revaluation reserves Translation reserve Accumulated loss Total Noncontrolling interests Total At 1 January 2015 (restated)* 247.193 86.142 11.652 (7.773) 72.701 40.015 (2.484) (148.060) 299.386 (647) 298.739 Previous year correction - - - - - 27.689 - (107.819) (80.130) - (80.130) At 1 January 2015 (restated)* 247.193 86.142 11.652 (7.773) 72.701 67.704 (2.484) (255.879) 219.256 (647) 218.609 Net loss (restated)* - - - - - - - 4.282 4.282 (263) 4.019 Other comprehensive income/(loss) - - - - - - (632) - (632) - (632) Total comprehensive income/(loss) - - - - - - (632) 4.282 3.650 (263) 3.387 Transactions with owners Reinvestment of profits 14 - - - - 8.274 - - (8.274) - - - Covering losses 30 - - - - (5.391) - - 5.391 - - - Disposal of subsidiary 37 - - - - - - - - - 214 214 Share capital increase 30 - - - (43) - - - - (43) - (43) At 31 December 2015 247.193 86.142 11.652 (7.816) 75.584 67.704 (3.116) (254.480) 222.863 (696) 222.167 Net loss - - - - - - - 36.769 36.769-36.769 Other comprehensive income/(loss) - - - - - 1.693 (72) - 1.621 1 1.622 Total comprehensive income/(loss) - - - - - 1.693 (72) 36.769 38.390 1 38.391 Transactions with owners Share capital increase 30 - - - (650) - - - - (650) - (650) At 31 December 2016 247.193 86.142 11.652 (8.466) 75.584 69.397 (3.188) (217.711) 260.603 (695) 259.908 * For the effect of restatement please see note 6. The accounting policies and notes form an integral part of these financial statements and consolidated financial statements. 25

CONSOLIDATED AND SEPARATE STATEMENT OF CHANGES IN EQUITY (continued) Company (all amounts are expressed in thousands of HRK) Note Share capital Share premium Legal reserves Treasury shares Statutory and other reserves Revaluation reserves Accumulated loss Total At 1 January 2015 (restated)* 247.193 86.142 11.487 (7.773) 40.654 40.015 (123.742) 293.976 Previous year correction - - - - - 27.689 (107.819) (80.130) At 1 January 2015 (restated)* 247.193 86.142 11.487 (7.773) 40.654 67.704 (231.561) 213.846 Net loss (restated)* - - - - - - 31.150 31.150 Other comprehensive income/(loss) - - - - - - - - Total comprehensive income/(loss) - - - - - - 31.150 31.150 Transactions with owners Covering losses 30 - - - (43) - - - (43) At 31 December 2015 247.193 86.142 11.487 (7.816) 40.654 67.704 (200.411) 244.953 Net profit/(loss) - - - - - - 25.188 25.188 Other comprehensive income/(loss) - - - - - 1.693-1.693 Total comprehensive income/(loss) - - - - - 1.693 25.188 26.881 Transactions with owners Covering losses 30 - - - (650) - - - (650) At 31 December 2016 247.193 86.142 11.487 (8.466) 40.654 69.397 (175.223) 271.184 * For the effect of restatement please see note 6. The accounting policies and notes form an integral part of these financial statements and consolidated financial statements. 26

CONSOLIDATED AND SEPARATE STATEMENT OF CASH FLOWS Dalekovod Group Dalekovod d.d. (all amounts are expressed in thousands of HRK) Note 2016 2015 2016 2015 Profit/(loss) before tax 52.612 12.780 38.159 39.119 Adjustments: Depreciation and amortisation 17, 18, 19 51.335 50.907 34.321 33.950 Property, plant and equipment writte-off 11 1.788 415 10 29 Impairment of investment property 11-766 - - Loss/(gain) on sale of property, plant and equipment 12 (315) (623) (167) (494) Fair value measurement loses of financial assets available for sale 12 (31) 134 180 2 Gain on disposal of financial assets available for sale 12 - (531) - (531) Gain on change in fair value of financial assets trough profit and loss 12 (108) (199) (108) (199) Loss on sale of subsidiary 12, 37 (998) 5.804 - - Impairment of trade receivables and loans receivable 8 (3.440) (10.702) (1.129) (9.692) Impairment of other financial assets 11 311 2.370 311 - Impairment of investments in associates 13 11.951-11.951 - Impairment of non-financial assets 11 48 - - - Impairment of inventories 11 (507) (8.397) - (3.009) Net change in provisions 34 (3.770) 20.585 (3.815) 20.295 Dividend income 13 - - (4.426) (12.966) Share in loss/(gain) of associates and joint ventures 21 (26) (14) - - Unrealised foreign exchange differences (9.571) 2.781 (5.418) (1.247) Interest income 8, 13 (3.258) (5.433) (3.125) (3.633) Income from interest and fees write-offs 13 (21.473) - - - Income from unwinding of discount 13 (31) (807) (31) (807) Other finance income 13 (1) (105) - - Interest expense 11, 13 36.835 38.783 22.183 24.891 Changes in working capital: 111.351 108.514 88.896 85.708 Trade and other receivables 56.274 (104.854) 79.491 (81.755) Inventories (38.487) 33.509 9.429 2.833 Trade and other payables (58.877) 87.083 (111.993) 96.880 Net cash generated from operating activities 70.261 124.252 65.823 103.666 Interest paid (29.414) (23.438) (20.419) (22.624) Tax paid (12.741) (21.327) (12.612) (19.444) Net cash flows from operating activities 28.106 79.487 32.792 61.598 The accounting policies and notes form an integral part of these financial statements and consolidated financial statements. 27

CONSOLIDATED AND SEPARATE STATEMENT OF CASH FLOWS (continued) Dalekovod Group Dalekovod d.d. (all amounts are expressed in thousands of HRK) Note 2016 2015 2016 2015 Cash flows from investing activities Acquisition of intangible assets 17 (2.260) (1.445) (472) (1.165) Acquisition of property, plant and equipment 18 (26.954) (20.810) (17.641) (9.090) Acquisition of investment property 19 - (6.983) - (6.983) Proceeds from sale of property, plant and equipment 608 1.448 173 540 Deposits given (3.238) (6.877) (4.856) (8.241) Deposits received 3.869 - - - Loans given - (22.652) (53.470) (44.951) Repayments of loans given 431 1.331 46.022 14.408 Investments in subsidiaries 20 - - - (45) Proceeds from sale of subsidiary 20, 37-1.581-2.000 Proceeds from share in profits - - 2.258 14.498 Proceeds from sale of available-for-sale financial assets - 5.000-5.000 Investments in cash funds - 10.000-10.000 Interest received 2.709 4.649 2.698 3.091 Net cash flows used in investing activities (24.835) (34.758) (25.288) (20.938) Cash flows from financing activities Acquisition of own shares (650) (43) (650) (43) Proceeds from borrowings 44.710 30.011 7.806 7.548 Repayment of borrowings (34.215) (30.765) - - Repayment of finance lease liabilities (9.765) (8.243) (9.660) (8.078) Net cash flows from / (used in) financing activities 80 (9.040) (2.504) (573) Net increase / (decrease) in cash and cash equivalents 3.351 35.689 5.000 40.087 Cash and cash equivalents at beginning of year 102.077 66.388 81.849 41.762 Cash and cash equivalents at end of year 28 105.428 102.077 86.849 81.849 The financial statements set out on pages 21 to 111 were approved by the Management Board on 29 April 2017. The accounting policies and notes form an integral part of these financial statements and consolidated financial statements. 28

16

NOTES TO THE FINANCIAL STATEMENTS NOTE 1 GENERAL INFORMATION The Dalekovod Group (the Group) comprises the parent company Dalekovod d.d., Zagreb and 23 subsidiaries owned by the parent company and additional one company owned by subsidiary (2015: 24 subsidiaries owned by the parent company and additional three companies owned by subsidiaries) note 20. Dalekovod d.d., Zagreb (the Company) was incorporated in compliance with the laws and regulations of the Republic of Croatia. The registered office of the Company is in Zagreb, Marijana Čavića 4 street. The Company s shares are listed on the public joint stock company listing on the Zagreb Stock Exchange. The Company s principal activity is the engineering, production, construction and installation of electric power facilities, facilities for road, railroad and mass transit and telecommunication infrastructure. Management Board members of the Company during 2016 were: Mr. Alen Premužak (President of the Management Board), Mr. Marko Jurković (Member of the Management Board), Mr. Branimir Alujević (Member of the Management Board, resigned on 11 November 2016), Mr. Mirko Leko (Member of the Management Board, resigned on 11 November 2016), Ms. Helena Jurčić Šestan (Member of the Management Board,), Mr. Ivica Kranjčić (Member of the Management Board, appointed on 01 September 2016) and Mr.Ivan Kurobasa (Member of the Management Board, appointed on 11 November 2016). Going concern The Company went through the pre-bankruptcy settlement procedure, which also includes the financial and operational restructuring plan. Taking into account the Commercial court s approval of the prebankruptcy settlement between the Company as debtor and its creditors from 29 January 2014 and the subsequent increase in share capital financial statements have been prepared under the going concern principle. NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The principal accounting policies adopted in the preparation of these financial statements are set out below. These policies are applicable to both the Group and to the Company and they have been consistently applied to all the years presented, unless otherwise stated. 2.1 Basis of preparation The consolidated financial statements of the Group and the separate financial statements of the Company have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union (IFRS) under the historical cost convention, as modified by the revaluation of land, buildings, financial assets at fair value through profit or loss and available for sale financial assets. The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group s and the Company s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements, are disclosed in note 4. 30

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.1 Basis of preparation (continued) 2.1.1 Standards and Interpretations effective for the current period For its reporting period commencing on 1 January 2016, the Company has adopted the following new and amended standards adopted by the European Union and are relevant to the Company's financial statements. In the current reporting period, the following amendments to the existing standards and new interpretations published by the International Accounting Standards Board (IASB) are in force and adopted by the European Union: Amendments to IFRS 10 "Consolidated Financial Statements", IFRS 12 " Disclosure of Interests in Other Entities " and IAS 28 " Investments in Associates and Joint Ventures " - "Investment Entities: Application of Consolidation Exemptions", adopted in the European Union on 22 September 2016 (effective for annual periods beginning on or after 1 January 2016), Amendments to IFRS 11 " Joint arrangements: Accounting for Acquisitions of Interests in Joint Operations", adopted in the European Union on 24 November 2015 (effective for annual periods beginning on or after 1 January 2016) Amendments to IAS 1 "Presentation of Financial Statements" - "Disclosure Initiative", adopted in the European Union on 18 December 2015 (effective for annual periods beginning on or after 1 January 2016) Amendments to IAS 16 "Property, Plant and Equipment" and IAS 38 "Intangible Assets" - "Clarification of Acceptable Methods of Depreciation and Amortization", adopted in the European Union on 2 December 2015 (effective for annual Periods beginning on or after 1 January 2016), Amendments to IAS 16 "Property, plant and equipment" and IAS 41 "Agriculture" - "Plants" adopted by the European Union on November 23, 2015 (effective for annual periods beginning on or after 1 January) January 2016), Amendments to IAS 19 Employee Benefits - "Defined benefit plans: Employee Contributions", adopted in the European Union on 17 December 2014 (effective for annual periods beginning on or after 1 February 2015). Amendments to IAS 27 "Separate Financial Statements" - "Method of Share in Separate Financial Statements", adopted in the European Union on 18 December 2015 (effective for annual periods beginning on or after 1 January 2016) Amendments to the various standards under the heading "Update of IFRS from the 2010-2012 Cycle" arising from the IFRS Annual Compensation Project (IFRS 2, IFRS 3, IFRS 8, IFRS 13, IAS 16, IAS 24 and IAS 38) Primarily for the purpose of eliminating the inconsistency and clarification of the text adopted in the European Union on 17 December 2014 (applicable for annual periods beginning on or after 1 February 2015), 31

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.1 Basis of preparation (continued) Amendments to the various standards under the heading "Update of IFRS for the period 2012-2014" arising from the IFRS annual adjustment project (IFRS 5, IFRS 7, IAS 19 and IAS 34), primarily to eliminate discrepancies and clarification of the text, adopted In the European Union on 15 December 2015 (applicable for annual periods beginning on or after 1 January 2016), the adoption of these amendments to existing standards and interpretations did not result in material changes to the financial statements. 2.1.2 Standards and Interpretations issued by IASB and adopted in the European Union but not yet in force On the date of approval of the financial statements, the following new standards and interpretations of these changes were published but not in force: IFRS 9 "Financial Instruments", adopted in the European Union on 22 December 2016 (effective for annual periods beginning on or after 1 January 2018) IFRS 15 "Revenue from Contracts with Customers" and Amendments to IFRS 15, adopted in the European Union on 22 September 2016 (effective for annual periods beginning on or after 1 January 2018). 2.1.3 New Standards of Amendments to Existing Standards issued by IASB and not yet adopted in the European Union The IFRSs currently adopted in the European Union do not differ significantly from the regulations issued by the International Accounting Standards Board (IASB), except for the following standards, amendments to existing standards and interpretations, the adoption of which by the European Union until 27 February 2017 has not yet been adopted The decision (the dates of entry into force set out below apply to IFRSs as a whole): IFRS 14 "Regulatory deferral accounts" (effective for annual periods beginning on or after 1 January 2016) - The European Commission has decided to postpone this transition standard until the publication of its final version, IFRS 16 "Leases" (effective for annual periods beginning on or after 1 January 2019), Amendments to IFRS 2 "Share-based Payments" - "Classification and Measurement of Share based Payment Transactions " (effective for annual periods beginning on or after 1 January 2018), Amendments to IFRS 4 "Insurance Contracts" - "Applying IFRS 9" Financial Instruments "in conjunction with IFRS 4" Insurance Contracts" (effective for annual periods beginning on or after 1 January 2018 or those in which IFRS 9 "Financial Instruments" applies for the first time), Amendments to IFRS 10 "Consolidated Financial Statements" and IAS 28 " Investments in Associates and Joint Ventures " - " Sale or Contribution of Assets between an Investor and its Associate or Joint Venture " and subsequent amendments (the original date of entry into The power was postponed until the completion of the research project on the application of the share method), 32

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.1 Basis of preparation (continued) Amendments to IFRS 15 " Revenue from Contracts with Customers " - IFRS 15 " Revenue from Contracts with Customers " (effective for annual periods beginning on or after 1 January 2018), Amendments to IAS 7 "Cash Flow Statement" - "Disclosure Initiative" (effective for annual periods beginning on or after 1 January 2017), Amendments to IAS 12 "Income Taxes" - " Recognition of Deferred Tax Assets for Unrealized Losses " (effective for annual periods beginning on or after 1 January 2017), Amendments to IAS 40 "Investment property "-" Transfer of Investment property "(effective for annual periods beginning on or after 1 January 2018), Amendments to the various standards under the heading "Adjustment of IFRS from Cycle 2014-2016" arising from the IFRS Annual Compensation Project (IFRS 1, IFRS 12 and IAS 28) primarily to eliminate discrepancies and clarify the text (amendments to IFRSs 12 apply to annual periods beginning on or after 1 January 2017, and amendments to IFRS 1 and IAS 28 to annual periods beginning on or after 1 January 2018) IFRIC Interpretation no. 22 "Foreign Currency Transactions and Advance Consideration" (effective for annual periods beginning on or after 1 January 2018) Amendments to IAS 16 and IAS 38: Clarification of Acceptable Methods of Depreciation and Amortization 2.2 Consolidation (a) Subsidiaries In the separate financial statements, the Company carries investments in subsidiaries at cost less impairment. Investments are tested annually for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Investments in subsidiaries that suffered an impairment in previous periods are reviewed for possible reversal of the impairment at each reporting date. Subsidiaries are all entities over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group (acquisition date). They are deconsolidated from the date that control ceases. The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. The date of exchange is the acquisition date where a business combination is achieved in a single transaction, and is the date of each share purchase where a business combination is achieved in stages by successive share purchases. 33

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.2 Consolidation (continued) Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Group s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the acquired, the difference is recognised directly in the income statement. Inter-company transactions, balances and unrealised gains on transactions between Group companies are eliminated on consolidation. Unrealised losses are also eliminated, unless there is evidence of impairment of transferred assets. Accounting policies of subsidiaries are changed where necessary to ensure consistency with the policies adopted by the Group. (b) Changes in ownership of subsidiaries without loss of control The Group treats transactions with non-controlling interests as transactions with equity owners of the Group. For purchases from non-controlling interests, the difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary is recorded in equity. Gains or losses on disposals to non-controlling interests are also recorded in equity. (c) Disposal of subsidiaries When the Group ceases to have control or significant influence, any retained interest in the entity is remeasured to its fair value, with the change in carrying amount recognised in profit or loss. The fair value is the initial carrying amount for the purposes of subsequently accounting for the retained interest as an associate, joint venture or financial asset. In addition, any amounts previously recognised in other comprehensive income in respect of that entity are accounted for as if the Group had directly disposed of the related assets or liabilities. This may mean that amounts previously recognised in other comprehensive income are reclassified to profit or loss. If the ownership interest in an associate is reduced but significant influence is retained, only a proportionate share of the amounts previously recognised in other comprehensive income are reclassified to profit or loss where appropriate. (d) Associates Associates are all entities over which the Group or the Company have significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. The Group accounts for investments in associates using the equity method and the Company accounts for them at cost. The Group s share of its associates post-acquisition profits or losses is recognised in the income statement, and its share of post-acquisition movements in other comprehensive income is recognised in other comprehensive income. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. When the Group s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate. 34

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.2 Consolidation (continued) (d) Associates Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group s interest in the associates. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of associates are been changed where necessary to ensure consistency with the policies adopted by the Group. (e) Mergers The predecessor method of accounting is used to account for the merger of entities under common control. The carrying value of assets and liabilities of the predecessor entity are transferred as balances in the merged entity. On the date of the merger, inter-company transactions, balances and unrealised gains and losses on transactions between the two entities merging are eliminated. Any difference between the carrying value of net assets merged and net assets given up is recorded as equity. (f) Joint ventures The Group's interest in a jointly controlled entity is accounted for using the equity method of accounting and is initially recognised at cost. Under the equity method, the Group s share of post-acquisition profits or losses is recognised in the income statement, whereas its share of post-acquisition movements in other comprehensive income is recognised in other comprehensive income. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. 2.3 Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker, responsible for allocating resources and assessing performance of the operating segments, has been identified as the Management Board of the Company. 2.4 Foreign currencies (a) Functional and presentation currency Items included in the financial statements of each of the Group s entities are measured using the currency of the primary economic environment in which the entity operates ( the functional currency ). The consolidated financial statements are presented in Croatian Kuna (HRK), which is the Company s functional and presentation currency. (b) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement. 35

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.4 Foreign currencies (continued) (c) Group companies The results and financial position of all the Group entities that have a functional currency different from the presentation currency are translated into the presentation currency as follows: (i) (ii) (iii) assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet; income and expenses for each income statement are translated at average exchange rates; and all resulting exchange differences are recognised as a separate component of equity. On consolidation, exchange differences arising from the translation of the net investment in foreign operations are taken to Cumulative foreign exchange differences within shareholders equity. When a foreign operation is partially disposed of or sold and control over the subsidiary is lost, exchange differences that were recorded in equity are recognised in the income statement as part of the gain or loss on sale. 2.5 Property, plant and equipment 2.5.1 Property, plant and equipment Land, buildings and other tangible assets, except assets under foreclosure, are carried in the balance sheet at historical cost less accumulated depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the asset s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognised. All other repairs and maintenance are charged to the income statement during the financial period in which they are incurred. Land and assets under construction are not depreciated. Depreciation is calculated when asset is available and ready to use. Depreciation is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives, as follows: Useful lives in years Buildings 20 40 Equipment 5 10 Machinery 25 36

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.5.1 Property, plant and equipment (continued) The residual value of an asset is the estimated amount that the Group would currently obtain from disposal of the asset less the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life. The residual value of an asset is nil if the Group expects to use the asset until the end of its physical life. The assets residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. An asset s carrying amount is written down immediately to its recoverable amount if the asset s carrying amount is greater than its estimated recoverable amount (note 2.8). Gains and losses on disposals are determined by comparing proceeds with carrying amount. Gains and losses are included in the line item other (losses)/gains net in the income statement. 2.5.2 Assets under foreclosure Assets under foreclosure are carried at fair value based on periodic, but at least triennial, valuations by external independent assessors. Increases in the carrying amount of assets under foreclosure arising on revaluation are credited to other comprehensive income and presented in equity under revaluation reserves. Decreases that offset previous increases of the same asset are charged against revaluation reserves directly in equity; all other decreases are charged to the income statement. Land after initial recognition is stated at a revalued amount that makes its fair value at the date of revaluation less any accumulated impairment losses. Independent estimates of land values are made when the carrying amount is significantly different from the fair value. Any increase in the value of the land is recorded within other comprehensive income on the revaluation reserve position, unless and only to the extent to which it invalidates the value of the same asset that was previously recognized as an expense and in that case is shown as income. Any impairment is first offset by an increase that relates to an earlier valuation of the value of the same asset and subsequently recognized as an expense. The relevant part of the revaluation reserves made during the previous valuation of the value is released from the revaluation reserves directly to retained earnings after the disposal of the asset. After initial recognition at cost, buildings are recognized at a revalued value, which represents fair value on the revaluation date less any subsequent depreciation on buildings and expense impairment. Fair value is based on market value, which is the estimated value for which the asset could be sold at the date of valuation between voluntary parties under normal business and commercial conditions. When the carrying amount of an asset increases as a result of revaluation, the increase is directly approved within of other comprehensive income on the revaluation reserve position. Revaluation increases are recognized as income to the extent that it reverses the revaluation reduction of the same asset previously recognized as an expense. When the carrying amount of the asset is reduced as a result of revaluation, this decrease is recognized as expense. Revaluation reduction directly charges the revaluation reserve within other comprehensive income to the extent that this decrease does not exceed the amount that exists as a revaluation reserve for the same asset. 37

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.5.2 Assets under foreclosure (continued) Every year transfer from other comprehensive income (revaluation reserves) to other reserves are made in amount not higher then depreciation of revalued asset. Also, the accumulated amortization at the date of revaluation is made and excludes the carrying amount of the gross carrying amount of the asset and the net amount is adjusted to the revalued amount of asset. At the time of withdrawal from use or alienation, all remaining revaluation reserves of such assets are transferred to retained earnings. 2.6 Investment property 2.6.1 Investment property Investment property, except assets under foreclosure, principally comprising office buildings and land, is held for long-term rental yields or appreciation. Investment property is treated as a long-term investment unless it is intended to be sold in the next year and a buyer has been identified, in which case it is classified within current assets. Investment property is carried at historical cost less accumulated depreciation and provision for impairment, where required. Depreciation for buildings is calculated using the straight-line method to allocate cost over estimated useful life (20 to 40 years). Subsequent costs are capitalised only when it is probable that future economic benefits associated with it will flow to the Group and the cost can be measured reliably. All other repairs and maintenance costs are expensed when incurred. If an investment property becomes owner-occupied, it is reclassified to property, plant and equipment, and its carrying amount at the date of reclassification becomes its deemed cost to be subsequently depreciated. 2.6.2 Assets under foreclosure Assets under foreclosure are carried at fair value based on periodic, but at least triennial, valuations by external independent assessors. Increases in the carrying amount of assets under foreclosure arising on revaluation are credited to other comprehensive income and presented in equity under revaluation reserves. Decreases that offset previous increases of the same asset are charged against revaluation reserves directly in equity; all other decreases are charged to the income statement. Land after initial recognition is stated at a revalued amount that makes its fair value at the date of revaluation less any accumulated impairment losses. Independent estimates of land values are made when the carrying amount is significantly different from the fair value. Any increase in the value of the land is recorded within other comprehensive income on the revaluation reserve position, unless and only to the extent to which it invalidates the value of the same asset that was previously recognized as an expense and in that case is shown as income. Any impairment is first offset by an increase that relates to an earlier valuation of the value of the same asset and subsequently recognized as an expense. The relevant part of the revaluation reserves made during the previous valuation of the value is released from the revaluation reserves directly to retained earnings after the disposal of the asset. 38

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.7 Intangible assets (a) Goodwill Goodwill represents the excess of the acquisition cost over the carrying value of the Group s share of the net identifiable assets of the acquired business sector at the acquisition date. Goodwill on acquisition is included in intangible assets. Separately recognised goodwill is tested annually for impairment, or whenever there are indications of impairment, and is carried at cost less accumulated impairment losses. Impairment losses on goodwill are not reversed. Goodwill is allocated to cash-generating units for the purpose of impairment testing. The allocation is made to those cash-generating units that are expected to benefit from the business combination in which the goodwill arose, identified by business segment. If a part or the whole cash generating unit is sold, the related goodwill is included in the carrying amount of net assets sold when determining gain or loss on the transaction. (b) Computer software Computer software is capitalised on the basis of the costs incurred to bring to use the specific software. These costs are amortised over their estimated useful lives (5 years). 2.8 Impairment of non-financial assets Assets that have an indefinite useful life (such as land or goodwill) which are not subject to amortisation are tested annually for impairment. Assets that are subject to amortisation and depreciation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date. 39

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.9 Financial assets The Group and the Company classify their financial assets in the following categories: at fair value through profit or loss, available-for-sale financial assets and loans and receivables. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition. (a) Financial assets at fair value through profit or loss Financial assets valued at fair value through profit or loss are financial assets held for trading. A financial asset is classified in this category if acquired principally for the purpose of selling in the short term. Assets in this category is classified as current assets. Financial assets valued at fair value through profit or loss are initially recognised at fair value and transaction costs are expensed in the income statement. Gains or losses arising from changes in the fair value of the financial assets at fair value through profit or loss category are presented in the income statement within the line item other (losses)/gains net in the period in which they arise. (b) Available-for-sale financial assets Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. They are included in non-current assets unless management intends to dispose of the investment within 12 months of the balance sheet date. Available-for-sale financial assets are carried at fair value and the transaction costs are recorded in the income statement. Changes in the fair value of monetary securities and non-monetary securities classified as available-forsale are recognised in other comprehensive income. In the case of equity securities classified as available for sale, a significant or prolonged decline in the fair value of the security below its cost is considered as an indicator that the securities are impaired. If any such evidence exists for financial assets, the cumulative loss measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in profit or loss is removed from equity and recognised in the income statement. When securities classified as available-for-sale are sold or impaired, the accumulated fair value adjustments recognised in equity are included in the income statement in line item other (losses)/gains net. Interest on available-for-sale securities calculated using the effective interest rate method is recognised in the income statement. Dividends on available-for-sale securities are recognised in the income statement when the right to receive payment is established. The Group and the Company assess at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. Impairment losses recognised in the income statement on equity instruments are not reversed through the income statement. 40

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.9 Financial assets (continued) (c) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the balance sheet date which are classified as non-current assets. Loans and receivables are carried at amortised cost using the effective interest method. Trade and loan receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. A provision for impairment of receivables is established when there is objective evidence that the Group and the Company will not be able to collect all amounts due according to the original terms of receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy, and default or delinquency in payments are considered indicators that the receivable is impaired. The amount of the provision is the difference between the asset s carrying amount and the present value of estimated future cash flows, discounted at the effective interest rate. The amount of the provision is recognised in the income statement within other operating expenses. Subsequent recoveries of the provision for impairment of trade receivables are recorded in the income statement within other operating expenses. 2.10 Leases (a) The Group and the Company are the lessee The Group and the Company lease certain property, plant and equipment. Leases of property, plant and equipment, where the Group or the Company has substantially all the risks and rewards of ownership, are classified as finance leases. Finance leases are capitalized at the lease s commencement at the lower of fair value of the leased property or the present value of minimum lease payments. Each lease payment is allocated between the liability and finance charges so as to achieve a constant rate on the balance outstanding. The interest element of the finance costs is charged to the income statement over the lease period. The property, plant and equipment acquired under finance leases are depreciated over the shorter of the useful life or the lease term. Leases in which a significant portion of risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases are charged to the income statement on a straight-line basis over the period of the lease. (b) The Group and the Company are the lessor Assets under an operating lease where the Group and the Company are the lessor are depreciated over their expected useful lives on a basis consistent with similar owned assets. Rental income is recognised on a straight-line basis over the lease term, even if the proceeds are not balanced, unless there is an alternative basis representing the time frame in which the benefits of the lease and the depreciation of the leased property are matched. 41

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.11 Inventories Inventories of raw materials and spare parts are stated at the lower of cost, determined using the weighted average method, or net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses. The cost of work-in-process and finished goods comprise raw materials, direct labour, other direct costs and related production overheads (based on normal operating capacity). Small inventory and tools are expensed when put into use. 2.12 Construction contracts Contract costs are recognised when incurred. When the outcome of a construction contract cannot be estimated reliably, contract revenue is recognised only to the extent of contract costs incurred that are likely to be recoverable. When the outcome of a construction contract can be estimated reliably and it is probable that the contract will be profitable, contract revenue is recognised over the period of the contract. When it is probable that total contract costs will exceed total contract revenue, the expected loss is recognised as an expense immediately. The Group and the Company use the percentage of completion method to determine the appropriate amount to recognise in a given period. The stage of completion is measured by reference to the contract costs incurred up to the balance sheet date as a percentage of total estimated costs for each contract. Costs incurred in the year in connection with future activity on a contract are excluded from contract costs in determining the stage of completion. Costs are presented as inventories, prepayments or other assets, depending on their nature. The Group and the Company present as an asset the gross amount due from customers for contract work for all contracts in progress for which costs incurred plus recognised profits (less recognised losses) exceed progress billings. Progress billings not yet paid by customers and retention are included within trade and other receivables. The Group presents as a liability the gross amount due to customers for contract work for all contracts in progress for which progress billings exceed costs incurred plus recognised profits (less recognised losses). 2.13 Cash and cash equivalents Cash and cash equivalents comprise cash in hand, deposits held at call with banks and other short-term highly liquid instruments with original maturities of three months or less. 42

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.14 Share capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. Where the Company purchases its equity share capital (treasury shares), the consideration paid, including any directly attributable incremental costs (net of income taxes) is deducted from equity attributable to the Company s equity holders until the shares are cancelled or reissued. Where such shares are subsequently reissued, any consideration received, net of any directly attributable incremental transaction costs and the related income tax effects, is included in equity attributable to the Company s equity holders. 2.15 Borrowings Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the period of the borrowings using the effective interest method. Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset form part of the cost of that asset. Other borrowing costs are recognised as an expense in the income statement. Fees paid on the establishment of loan facilities are recognised as transaction costs of the loan extent that it is probable that some or all of the facility will be drawn down. Borrowings are classified as current liabilities unless the Group or the Company have an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date. 2.16 Income tax The tax expense for the year comprises current and deferred tax. Tax is recognised in the income statement, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case the tax is also recognised in other comprehensive income or directly in equity, respectively. The current tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date in the countries where the Company and its subsidiaries operate and generate taxable income. The tax base represents the difference between income and expenses, as determined by the applicable law. Management of the Group periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulations are subject to interpretation and consider establishing provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. 43